The unemployed former car salesman who says he was abducted by US agents in the Macedonian capital, Skopje on December 31, 2003, and flown to a prison in Afghanistan for questioning before being released five months later in Albania, without any explanation.
He was demanding an apology from the US government and $75,000 in compensation.
The court's verdict will be welcomed by George Bush, the US president, and his administration who had called on the supreme court to reject the case for reasons of national security, arguing it could neither confirm nor deny al-Masri's allegations without revealing the secret activities of the CIA.
Al-Masri's lawyers from the American Civil Liberties Union challenged what they called the Bush administration's increased invoking of national security secrets to prevent any judicial inquiry into serious allegations of misconduct.
al-Masri's case sparked outrage in Germany and prompted a parliamentary inquiry to find out what authorities might have known about US renditions.
The Bush administration has also used the so-called state secrets privilege in an effort to dismiss lawsuits over a domestic spying programme created after the September 11 attacks.
In documents filed to the supreme court last week, al-Masri's lawyers pointed out that Bush had already publicly acknowledged the existence of the CIA's rendition programme.
Other details of al-Masri's case had also been made public in news reports, including the plane used to fly him to Afghanistan, they argued.
"As a matter of law and common sense, the government cannot legitimately keep secret what is already widely known," they argued.
If the supreme court rejected al-Masri's case, then "the government may engage in torture, declare it a state secret and by virtue of that designation avoid any judicial accountability for conduct that even the government purports to condemn as unlawful under all circumstances," they said.
"Under a system predicated on respect for the rule of law, the government has no privilege to violate our most fundamental legal norms," the lawyers' deposition said.